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Safeguard Scientifics, Inc. (NYSE:SFE)

Q3 2011 Earnings Conference Call

October 26, 2011 9:00 AM ET

Executives

John Shave – VP, Business Development and Corporate Communications

Peter Boni – President and CEO

Steve Zarrilli – SVP and CFO

Analysts

Nick Halen – Sidoti & Company

Matt Dolan – Roth Capital Partners

Troy Ward – Stifel Nicolaus

Reggie Miller – CSLA

Allen Zwickler – First Manhattan

Operator

Thank you for standing by and welcome to the Safeguard Scientifics Third Quarter 2011 Results Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session.

(Operator instructions)

Please be advised that the conference is being recorded today October 26, 2011. I would now like to hand the conference over to your speaker, Mr. John Shave, Vice President of Business Development and Corporate Communications. Thank you. Please go ahead.

John Shave

Good morning, and thank you for joining us for our third quarter conference call and update. Joining me on today’s call are Peter Boni, Safeguard’s Chief Executive Officer and President; and Steve Zarrilli, Senior Vice President and Chief Financial Officer.

During today’s call, Peter will review third quarter 2011 highlights and other developments and Steve will discuss Safeguard’s financial results and strategies. After that, we will open up the lines for your questions.

Before we begin, I must remind you that today’s presentation includes forward-looking statements. Reliance on forward-looking statements involve certain risks and uncertainties, including but not limited to the uncertainty of future performance of our partner companies, the risks of acquisition or disposition of interest in partner companies, capital spending by customers and the effect of regulatory and economic conditions generally, as well as the development of the life sciences and technology markets and other uncertainties that are described in our filings.

During the course of today’s call, words such as expect, anticipate, believe and intend will be used in our discussion of goals or events in the future. Management cannot be certain that final outcomes will be as described today. We encourage you to read our filings with the SEC, including our 10-K, which describe in detail the risks and uncertainties associated with managing our businesses. The company does not assume any obligation to update any forward-looking statements made today.

Now here is Safeguard’s President and CEO, Peter Boni.

Peter Boni

Thanks, John. And thank you all for joining us today for updates on Safeguard Scientifics and our partner companies. Before we get into the discussion about our third quarter results, I am pleased to announce that effective immediately, Jim Datin, our executive VP and managing director will assume responsibility for leading the deal professionals. The capital deployment strategy remains unchanged, and we look to leverage our domain expertise in life sciences and technology.

We believe the combined management of the life sciences and technology deal team is under the leadership of a proven executive will better organizationally align and streamline Safeguard, and the integration will also better focus and leverage Safeguard’s sourcing and capital deployment process, while capitalizing on the accelerated trend for the convergence of technology and life sciences.

Additionally, Jim’s background uniquely combines executive experience in devices, diagnostics, and drug delivery along with sea level experience in information technology. Jim has also been the CEO of a company in the initial revenue and expansion stages. Jim was CEO of TouchPoint solutions, group president of Dendrite International, and held executive positions and operations in corporate development in Glaxo SmithKline, Isuta Holdings, and then Baxter/Merck. So success breeds success.

Now back to the results of the third quarter ended September 30, which we distributed earlier today. We are pleased by the continuous growth of Safeguard’s partner companies, and we remain optimistic about our prospects going forward. Focus, discipline on execution characterize Safeguard’s performance in the period, and year-to-date. Despite volatile capital markets and a wobbly economy, the company continues to fire on all cylinders, realizing value through well timed exit transactions and deploying capital in new growth opportunities.

Safeguard is financially strong, enjoys excellent financial flexibility and liquidity, and remains positioned for continued growth. Our growing success and radically improved balance sheet strengths are among other things generating increased awareness of the Safeguard brand. We are confident that the talented team is up to the challenge of building on Safeguard’s positive momentum as the preferred catalyst for growth stage companies.

Focus is the first pillar of Safeguard strategic foundation. We deploy capital in high technology businesses within specific segments of life sciences and technology industries that exploit five strategic growth driving themes, maturity, migration, conversions, compliance, and cost containment.

In life sciences, we target opportunities in the areas of lower relative technological and regulatory risk, namely in molecular and point of care diagnostics, medical devices, regenerative medicine, specialty pharmaceuticals, and selected health care services. In technology, we pursue transaction enabling applications with the recurring revenue business model in internet media, financial technology, IT healthcare and some selected business services.

Safeguard’s discipline complements our focus. We will not deploy capital or pursue exits simply for activities sake. If an opportunity clears our strategic growth and return hurdles, we will respond appropriately. So that discipline is applied to the outset of our capital deployment process. Safeguard’s deal teams evaluate thousands of proposals annually. By contrast our partner Roster [ph] total 13 companies today. We typically deploy up to $25 million in growth capital per company, and then time our exits from ownership positions in these companies to achieve aggregate targeted risk adjusted returns on capital of 3 to 5 times over a 3 to five-year time period.

We are also open to opportunities among later stage lower middle market businesses, the cash on cash return target for later stage deals might be slightly lower than the current 3 to 5 target, but it is anticipated that the time horizon may also be shorter as well. Exit opportunities may arise in any time, and in different forms, including privately negotiated sales of securities or assets, public offerings of securities as well. In the case of publicly traded partner companies, exits can involve the sale of securities in the open market.

Now execution is how focus and discipline are tested and that is how Safeguard has distinguished itself. According to data recently presented by Cambridge Associates, US venture capital investments made in 2006 generated an average cash on cash return of 1.2 times, and by way of comparison, Safeguard has realized aggregate cash on cash returns of 2.4 for all deployments that is made since January of 2006, and that which have been realized or written off.

So since the end of 2010, we have generated more than $350 million in aggregate cash proceeds through exit transactions involving partner companies Avid Radiopharmaceuticals, Advanced BioHealing, Clarient and Portico Systems. In all of those exits, the buyers were top tier multinational firms, including Eli Lilly, Shire Pharmaceuticals, GE Healthcare, and McKesson, respectively. Year-to-date we have deployed $16 million for ownership positions in promising new partner companies, NovaSom, PixelOptics, Putney, and (inaudible).

In addition, we provided $14 million in follow-on capital for existing holdings, and we have utilized $31 million to retire outstanding debt. During the third quarter, we finalized our relationship with Penn Mezzanine, a mezzanine lending firm that provides subordinated debt and structured equity financing to lower and middle market businesses, principally in the Middle Atlantic region. Through this relationship, we expect to deploy up to $30 million over the next couple of years, including 3.9 million deployed in Q3.

Not only does this strategic partnership diversify Safeguard’s business platform, we believe it also will generate solid opportunities for current interest income and for future fee income and profit participation for us. These strategic initiatives are possible because of Safeguard’s improved financial strength and flexibility. We have worked to grow the company’s cash balance and reduce corporate debt. Safeguard’s net cash balance, including short-term and long-term marketable securities at September 30 was $235 million.

Now that is up from $218 million on June 30. At year end 2005 by the way our debt to equity ratio was 1:1. At September 30, 2011 the company’s debt to equity ratio was 1:8. Moreover, we have improved the match of our long-term obligations with exit expectations and cash deployment plans. So today we have significant financial strength, flexibility and liquidity. Focus, discipline, execution all serve Safeguard and its shareholders well. By any measure Safeguard is fundamentally stronger today, and better positioned for continued growth and value creation not only in 2011, but well beyond.

Now let us move now to highlight Safeguard’s newest partner company, Putney. Putney is in expansion stage, specialty pharmaceuticals company, with approximately $10 million in trailing 12 months revenue. During the quarter Safeguard lead a $21 million Series C financing for Putney deploying $10 million of capital for a 30% primary ownership stake and representation on Putney’s board of directors. Putney develops and distributes generic medicines for pets. The companies’ veterinary generics enable veterinarians to increase their margins, expand their revenues and treat pets to a complete line of online pharmacies [ph].

Putney has five drugs on the market now, and approximately 20 medicines in its pipeline with more expected to follow. Now we believe Putney is strongly positioned to capitalize on what the industry experts have characterized as the dawn of a bull market for generic animal health drugs. While Americans fill 78% of their own prescriptions with generics, only a few pet approved drugs have generic equivalents. Veterinary industry observers estimate that generics will account for half of all pet meds within a decade.

So Putney is an extraordinary growth opportunity for Safeguard. This transaction also offers new insights into our capital deployment process, as well as the appeal of Safeguard as a value added preferred catalyst among growth stage businesses. Our team identified Putney has having all five Ms of Safeguard’s go to market strategy. This Portland Maine-based partner has M, strong management, led by a serial entrepreneur, a veteran serial entrepreneur on top of that.

It has M a $5.7 billion addressable market. It has M a solid business model to drive value. It has M momentum for the existing commercial products with a significant new product pipeline and has M mode, meeting a defensible competitive position in barriers to entry. Founded in 2006, Putney will use proceeds from the financing to expand the company’s product pipeline, sales and marketing capabilities and other operations.

The partnership with Putney is very exciting. We are believing that that company’s strategy for developing and distributing effective, affordable, FDA approved generic veterinary medicines offers a unique solution for unmet needs in care of companion animals. Now as I mentioned earlier, the growing success and the improved strength of generating increased awareness of the Safeguard brand, Safeguard is increasingly recognized for adding value through operational expertise and our network of life sciences and technology context, as well as for our financial support.

For Putney, we can provide operational and strategic guidance as the company commercializes its products and accelerates its R&D and its pipeline. Now Putney selected Safeguard because we came to the table with a lot more than just capital. We are confident that Safeguard’s depth and breadth can drive Putney’s development as the leading provider of high quality bioequivalent and specialty veterinary drugs supporting the US veterinary community.

Now let us review some recent developments at a few of our current partner companies that underscore the power of the Safeguard business model. Within the Internet and the media companies, MediaMath continues to benefit from the ongoing seismic shift of advertising traditional media from print and broadcast platforms. Online US ad spending is forecast to increase 20% to more than $31 billion by the end of this year.

Founded in 2007, MediaMath creates an enterprise class digital media buying and reporting software platform that enables advertising agencies and advertisers to analyze billions of daily impressions and manage their campaigns according to specific objectives. Strong demand for the MediaMath platform known as terminal one is driving expansion of its domestic and its international operations. Offices have been opened in LA, Chicago, Boston, DC, Toronto and London, and additional offices are planned in Latin America and Asia.

The company is recognized as one of the hottest companies in the digital advertising space and it is now ranked among the world’s top 100 privately held firms. We initially deployed capital in MediaMath in 2009, and then we provided follow on funding this year, boasting our total capital deployment to $16.9 million in MediaMath for a 22% primary ownership position.

NuPathe is an emerging biopharmaceuticals company that develops and commercializes branded therapeutics for diseases of the central nervous system, including neurological and psychiatric disorders. MediaMath’s lead product candidate Zelrix is an active single use transdermal sumatriptan patch developed for the treatment of migraine. The patch is developed to improve migraine patient’s fast onset and sustained relief from migraine symptoms during headache pain and then migraine related nausea.

In two weeks, on November 9, NuPathe is scheduled to meet with the FDA to discuss questions the FDA raised in its complete response letter the company received in August. While the FDA raised questions centered around chemistry, manufacturing and safety aspects of the patch, the FDA did acknowledge the efficacy of the migraine patch in the overall migraine population.

NuPathe has completed a phase 3 program involving more than 800 patients and 10,000 patch applications. after that November 9 meeting, NuPathe plans to update the market with regards to its expectations around the timing and resubmission of the NDA. NuPathe has additionally some proprietary product candidates at the earlier stages of development, continuous symptomatic treatment for Parkinson’s disease, and then a pre-clinical treatment for schizophrenia and bipolar disorder.

NuPathe’s initial IPO in August grossed $50 million, in August of 2010 that is, grossed $50 million, Safeguard has deployed 18.3 million of capital in NuPathe since September of 2006. And we own 18% of outstanding common shares.

PixelOptics, a new company this year is ramping up its initial revenue stage with impressive new products poised to compete in the enormous global vision care market. With US regional launches, PixelOptics has began commercializing the world’s first and only electronically focusing prescription eyewear called Empower. The global vision care market is estimated at $84 billion, with annual sales of 100 million pair of multifocal lenses.

The US segment of that market is estimated at $27 billion, with sales of 20.6 million pairs of progressive lenses and 16 million pair of bifocals. For every 1% market penetration Empower gets that translates to $400 million in revenue for PixelOptics. Now Safeguard lead a $45 million equity and debt financing around for PixelOptics earlier in 2011. We deployed $25 million of the 35 million equity raise for a 25% primary ownership stake.

PixelOptics is changing the standard for care for eye glass wears through their novel approach to vision correction, and the transition between near and far distances. Empower substantially reduces or eliminates the perceived distortion and other limitations associative with multifocal lenses. Additionally more than 1000 domestic eye care professionals have signed on to get trained and to display Empower in their eye care locations. So interest in Empower is substantial.

There is no shortage of progress throughout Safeguard’s other partner companies, but in the interests of time I will stop now, and turn the call over to our chief financial officer, Steve Zarrilli, for an update on Safeguard’s financial strategies and our performance. Go ahead Steve.

Steve Zarrilli

Thanks Peter. Good morning. over the next few minutes, I want to outline a few big picture trends in the company’s financial performance and suggest the valuation methodology for Safeguard based on this management team’s track record since January of 2006.

Let us start with the valuation methodology, at September 30, Safeguard’s interest in its 13 partner companies represented an aggregate of $167 million of capital deployed. Our net cash, cash equivalents and marketable securities totaled 235 million as of that date. the sum of these components is $402 million. using shares outstanding of approximately 21 million, this total represents a value of $19 per share. Though we cannot predict or guarantee that we will perform in the future as well as in the past, Safeguard’s aggregate cash on cash returns have averaged 2.4 times for exit transactions and write-offs relating to partner company relationships created by our current management team since January of 2006.

This track record in combination with the value of assets currently deployed suggests substantial value to our shareholders in the future. Over the past five years, the Safeguard team has delivered meaningful and measurable results for shareholders. Despite unprecedented volatility in capital markets, we remain focused on building value in partner companies, realizing that value and then communicating our progress, concisely, consistently, and credibly.

Disciplined focus on enhancing Safeguard’s financial strength and flexibility also has positioned the company for continued success. We repaid and restructured corporate debt, controlled holding company expenses, and developed alternative sources of capital and income. Today Safeguard is stronger, leaner and better positioned to execute our game plan than in any other time in the past five years. This team’s focus on value creation is keen, and our optimism about Safeguard’s prospects are real.

Focus is that simple and that powerful. Of course, share repurchases, early debt retirement, or special dividends cannot be ruled out as potential uses of cash to enhance shareholder value. We have a fiduciary responsibility to consider all approaches. However, our team’s conviction is that strong that by continuing to execute the deploy, build and realize strategy, the fundamental elements of Safeguard’s proven strategic game plan can continue to deliver solid cash on cash returns and thus increase share value.

Our interests are closely aligned with Safeguard’s shareholders by virtue of our long-term compensation incentives. Our management team remains focused on building and realizing value for shareholders. Safeguard’s partnership with Penn Mezzanine represents our first initiative to augment our capabilities as a growth capital provider, and to participate in the management of external sources of capital.

This initiative is expected to produce current interest income and future management fee income and profit participation. Managed by a team of experienced mezzanine lenders this platform will enable Safeguard to provide flexible financing strategies to our current and prospective partner companies, as well as other potential borrowers. In August 2011, Penn Mezzanine closed its fund raising with an aggregate of 64 million available for lending and operations, including our $30 million commitment.

As of September 30, Penn Mezzanine has deployed 14.5 million in 4 companies. Debt terms have generally been 5 to 7 year maturities, 12% to 14.5% current pay interest, 2% closing fees, and 4% to 9% warrant coverage. Safeguard deployed 3.9 million in Penn Mezzanine during the quarter, and of our intended total capital deployment of 30 million, and we maintained a 36% ownership position in the management company.

Now let us more on to some key financial metrics for the quarter ended September 30. At September 30 we had $280 million in cash, cash equivalents and marketable securities, excluding cash held in escrow of $6.4 million and restricted cash equivalents of $12.3 million. During the quarter, primary uses of cash were, deployment of $10 million into Putney, deployment of 3.9 million into Penn Mezzanine, follow on funding to Swap.com of 2.4 million, follow-on funding to MediaMath of 1.2 million, cash operating expenses of 3.2 million. This total excludes interest, non-cash stock based compensation and depreciation expense.

For 2011, we continue to project cash operating expenses in the range of $17 million to $18 million. That range reflects the addition of experienced deal team professionals as well as certain anticipated corporate development expenses.

We reiterate our expected use of cash between $100 million and $150 million in 2011 for these major initiatives, capital deployment into new partner companies, follow-on funding for current partner companies, repayment of senior debentures, the expansion of our platform and corporate expenses.

Assuming no other deployment through the end of the year, and expenses not exceeding $18 million, total cash used in 2011 would be approximately $126 million. We do not expect to exceed our planned cash operating expense target amount. We believe that Safeguard and its partner companies remain well-positioned for continued revenue traction and value creation in 2011 and beyond.

We reiterated our previously announced guidance for 2011 aggregate partner company revenue of 175 million to 182 million, up from 140 million in 2010. for the three months and nine months ended September 30, aggregate partner company revenue was 46 million and 131 million respectively. Aggregate technology partner company revenue was 41 million, up 26%, and 115 million, up 46% for the three months and nine months ended September 30, 2011, respectively.

After the sales of Clarient and Advanced BioHealing most of Safeguard’s remaining life science partner companies are in the pre-revenue or early commercialization stages. Therefore aggregate revenue is not a meaningful measurement of their progress. Accordingly, we don’t expect these companies to generate significant revenue until they are more developed.

As a reminder, Safeguard reports revenue of partner companies on a one quarter lag basis. Our partner companies continued to execute aggressively, are using their cash to grow, and in some cases generating cash and making strategic and opportunistic acquisition. We work with the management teams at each partner company to evaluate levels of existing and required capital, strength of personal resources, and unique opportunities for growth.

Our focus on these ongoing processes allow Safeguard to assist partner company teams in unique ways to drive value creation and maturity. Now with that I will turn it over to Peter.

Peter Boni

Thanks very much Steve. (inaudible) let us open the phones up for any questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Nick Halen from Sidoti & Company.

Nick Halen - Sidoti & Company

Good morning guys.

Peter Boni

Good morning.

Nick Halen - Sidoti & Company

So, you know, obviously this morning I saw the release about Kevin resigning and I was just wondering if you guys can give us a little insight into what exactly happened there and kind of what led to that.

Peter Boni

Well, this is a success breeds success and we are building on success. We have an individual, Jim Dayton who has led an organization and led a great result for the company, and we’re rewarding that number one. We are recognizing that the integration of technology within healthcare is really a trend that is accelerating and we're acknowledging that the combination of our deal teams with one structure and one strategy has benefits for us. There is no change in strategy. We still have our three areas of expertise in diagnostics, devices and drug delivery and we still have our three areas and technology, IT, health care, financial technology, and Internet and media. We have resident experts inside of our deal teams for each of those. So Kevin made a decision.

Nick Halen - Sidoti & Company

Okay, and then lastly and I don't know if this is even at all possible, but I was wondering if you could maybe tell us a little bit more about the four companies that Penn Mezzanine right now is invested in.

Steve Zarrilli

Sure.

Peter Boni

I will ask Steve to take that.

Steve Zarrilli

So they are generally mid-Atlantic-based companies, generally with revenues of between $15 million and $25 million, generating strong profits and EBIDTA to meet their cash flow needs and to meet their debt requirements. Three of these companies are located within a 100 mile radius of Philadelphia, and represent what I will call more mainstream type businesses in the areas of distribution and business services.

Nick Halen - Sidoti & Company

Okay, great. Thanks guys.

Operator

Next question comes from Matt Dolan from Roth Capital Partners.

Matt Dolan - Roth Capital Partners

Hi guys. Good morning. Can you hear me?

Peter Boni

Yes Matt. Hear you fine.

Matt Dolan - Roth Capital Partners

Great. Thanks. So first question is on you know, the revenue trajectory, the company the ninth month number, which is probably the best metric has been strong and I know we'll be dealing with other contributors of revenue next year especially on the life sciences side, but with 27% expected this year, Q4 may be slowing down a little relative to the first three quarters of the year. Do you feel that that's a sustainable type of level for next year or maybe you could put some brackets around your expectations over the longer-term for growth?

Peter Boni

Well, we continue to experience significant growth Matt thanks to some growth teams that are driving that growth. Maturity migration, conversions, compliance, cost containment. For instance, MediaMath still sees this huge migration of off-line to online, and those kinds of trends continue. Obviously we are growing from a larger base in technology, but we’ll be next year growing from a smaller base in life sciences. So the anticipation to have is that substantial revenue growth will be the norm.

Matt Dolan - Roth Capital Partners

Okay, any numbers around that or relative to what we are seeing this year?

Peter Boni

We'll be giving some guidance at the appropriate time for 2012.

Matt Dolan - Roth Capital Partners

Okay, and then just to confirm out of the 150 targeted deployment this year Steve you had 126, is that – do you expect to get to 150?

Steve Zarrilli

We have a couple of things that we're working on right now Matt that with the right pacing could end up closing before the end of the year. But the reality is they may slip into January, and that's not necessarily going to be a bad thing. We will still be well within the range of what we projected, and if you recall over the past couple of years that first quarter has actually been fairly light in the past as it relates to new capital deployment and I think you'll see a difference in 2012 as it relates to not only deployment for the balance of this year but what we probably will see in the first 90 days of 2012.

Matt Dolan - Roth Capital Partners

Okay. So it sounds like the pipeline is fairly full here.

Steve Zarrilli

Yes, there is shortage of opportunity. We're just making sure that that we're doing our diligence, staying focused, practicing what we preach and sometimes deals take a little bit longer to get to closure just based upon the variety of moving parts involved in the transactions.

Matt Dolan - Roth Capital Partners

Okay, and then the final question is on alternative pools of capital and Penn using that as the example. You know, it's good to see that yield at 12%. Is your initial experience with Penn compel you to either A put more capital to work through that fund or B pursue other alternatives that might upset your annual operating expense. Thanks.

Peter Boni

Yes, I mean Penn Mezzanine obviously is going to be I think a real home run for us in a couple of different arenas, not only with regard to current income that you'll see beginning in 2012, but also the opportunity for enhanced returns but we are really focused on what we call co-participation funds in determining whether or not we can legitimately go out and raise ancillary pools of capital that we can use to further allow us to meet the demand that we're seeing in our pipeline.

Penn Mezzanine, if you recall, we refer to that as a co-managed opportunity and there is some real charm in these co-managed opportunities, but we want to make sure that we're able to structure them and execute upon them in a way that's going to provide shareholder value, and as we explore new opportunities in the co-managed arena, we are also wanting to make sure that we are learning the lessons through the Penn Mezzanine process so that we can even be more efficient in the creation of those relationships if they come to fruition.

Matt Dolan - Roth Capital Partners

So just to follow up, if we are to think about when these alternatives strategies might really meaningfully come into play and providing other income, again offsetting your spend that's probably kind of a one to two-year type of proposition from now before it's a big number.

Peter Boni

It's always difficult to determine how quickly they're going to come about, and keep in mind that we have not lost sight of the fact that the core engine is a real value creator for the shareholders. So the other thing that we're trying to do Matt is Peter and I are trying to make sure that the teams aren’t getting overly distracted with some of these other initiatives recognizing the value that's being created through the core engine as well. So it's a real balancing act and it's something that's very difficult to predict as to exact timing. Sometimes it's opportunistic as to how opportunities are presented to us and there is a lot deal structuring that has to be evaluated in connection with any one of these initiatives to see if it works for the Safeguard shareholders.

Matt Dolan - Roth Capital Partners

Great, thanks for the time.

Operator

Your next question comes from Troy Ward from Stifel Nicolaus.

Troy Ward - Stifel Nicolaus

Thank you. First of all can you just talk about a couple of the underlying portfolios, talk about how PixelOptics launch is going, if I recall, you said they started the regional launch. How is that going, now that we should be a few months into that?

Peter Boni

Hi Troy. Steve sits on the Pixel board. So I will ask Steve to pick that up.

Steve Zarrilli

Thanks Peter. So Pixel is actually has launched commercially. It began in the Southeast. Part of the process and getting to a successful launch was not only ensuring that there was a proper level of inventory around the lenses that are being produced by Panasonic, but ensuring that there was a proper quantity of frames that were being produced by Aspex and that the variety of frames of which there are more than 40 are properly displayed within the eye care professional’s office with the proper kiosk that allows for demonstration of the capabilities of the PixelOptics eyewear.

So that has been worked on very diligently over the course of the summer, and we are proud to report that we are now actively in the market in the Southeast and management in a very focused and conservative plan will move the commercialization process over the course of the fall, winter and early spring to the West Coast, then to the Midwest and then back to the northeast. So we are – we were probably about two months delayed in where we actually thought we would be because of some supply-chain matters that we needed to further refine, but I'm happy to report that we're now through that process and actively in the market selling these eyeglasses now in the Southeast.

Troy Ward - Stifel Nicolaus

And when would you expect it maybe start getting some you know, full-fledged media exposure. Are you starting that or is that designed to come a little bit later?

Steve Zarrilli

That media exposure has been full force. There was a lot of activity over the course of the summer. In fact, management was trying to slow the process just a little bit as they were realigning their timeline for commercialization. So as they now have gotten into the market you will see a revised or some additional activity but they have substantially been successful in creating the media buzz that you would expect around this product across a number of different media outlets.

Troy Ward - Stifel Nicolaus

Great, and then moving on to NovaSom can you just talk about where it is in the traction process and how its products are being received?

Peter Boni

NovaSom this quarter released the industry's first wireless device for home diagnostics of sleep apnea with some strong initial traction, and a variety of major opportunities in negotiation with primary healthcare players. So we were pretty pleased with their launch and their traction.

Troy Ward - Stifel Nicolaus

Can you quantify any of that for us Peter?

Steve Zarrilli

They have not quantified it. So I cannot quantify it.

Troy Ward - Stifel Nicolaus

Okay understood.

Steve Zarrilli

This company is and what we call the expansion phase, which is up to $20 million in revenue.

Troy Ward - Stifel Nicolaus

Okay and then finally can you talk a little bit about the pipeline for new activity, obviously with some pretty significant personnel changes here in the near term. How will that impact the future pipeline? Will you lean more maybe towards life sciences via tech and are there any segments you are actively avoiding at this point?

Peter Boni

We have a very strong pipeline really in all segments of our business, and we continue to drive that pipeline and mature it. We have resident experts in the technology arena around financial technology, Internet new media, those pipelines are rich, enterprise 3.0 driven by mobile computing is certainly looking very strong. Jim Dayton’s background in addition to diagnostics devices and drug delivery includes IT healthcare, and we have seen an acceleration of that trend of the integration of technology within a variety of healthcare products.

NovaSom that you asked about is a good example of that. NovaSom has a wireless device that collects data and that data is collected in a cloud for analysis and diagnostics. I mean is that a computer company, is that a software company, or is that a diagnostics company or a life-sciences company, and the answer to that is yes. PixelOptics uses a computer chip, an electronic liquid displays in its delivery of medical device and this integration is an overwhelmingly large and rapidly accelerating trend.

Troy Ward - Stifel Nicolaus

Okay, and then finally on Penn Mezzanine you know, looking at their portfolio, you know, it looks like a couple of them maybe have a slight manufacturing, but in medical devices as well as defense and other areas how would you characterize Penn’s target, what is the optimal target. Will it focus, do you think it will have a focus on some of the similar areas where you focused in the past or will it be much broader than that and maybe not in the technology and medical?

Peter Boni

Yes, I think they want intending to necessarily replicate the focus that Safeguard had, and we knew that going in, and that's okay because there will be opportunities at times to more fully collaborate on opportunities that they are seeing in areas that we actually have levels of expertise but we recognize in order to be a multifaceted capital provider in the marketplace that the lens will need to be opened at certain points.

In controlled fashions as well. So what Penn Mezzanine is focused on though it may not be completely replicate to what we're seeing at Safeguard, you have got quantified fund management professionals evaluating opportunities to put capital to work in a manner that will provide the returns that our shareholders are expecting, and that's a very important element to keep in mind. You know, Penn Mezzanine has both long-term profit opportunity for us as well as near term, short-term income flow and it's the balance of those two that I think is also meaningful to be remindful of as it relates to the strategic value to Safeguard.

Troy Ward - Stifel Nicolaus

Great, thank you gentlemen.

Peter Boni

Sure, thanks Troy.

Operator

Your next question comes from Paul Knight from CSLA.

Reggie Miller – CSLA

Hi good morning. This is Reggie in for Paul Knight.

Peter Boni

Hi Paul.

Reggie Miller – CSLA

It’s Reggie Miller in for Paul Knight.

Peter Boni

Okay, Reggie. Sorry Hi Reggie, not Hi Paul.

Reggie Miller – CSLA

Hi, I just wanted to ask what you're seeing for multiples in healthcare space compared to the beginning of this year versus now.

Peter Boni

Reggie that varies by segment. Diagnostics…

Reggie Miller – CSLA

Diagnostics specifically.

Peter Boni

The diagnostics has different multiples and devices, and devices have different multiples than specialty pharma, and they have different devices than IT healthcare. So it really, it also depends upon by segment. For instance, Putney’s multiples in Specialty Pharma have been up to 3X revenue. We recently divested of Clarient and that was a 5X revenue and it somewhat depends upon the stage of the company as well. A developmental stage company has different metrics than initial revenue stage company who has different metrics than an expansion stage company who has different metrics than a high traction company. So there is no simple answer to that.

Reggie Miller – CSLA

Okay and you're not seeing any general trends as in richer or less-expensive depending on let's say later stage companies.

Peter Boni

I think in the technology segment there has been somewhat of a build of valuation metric for some of the LinkedIn games, Zynga, Facebook mania kinds of multiples, but I believe with current market conditions we've seen that subside somewhat. You will also note that we haven't picked up an expansion stage rather a high traction stage technology company even though some of those were in our pipeline. The advantage we have with multiple domains and multiple stages is that the world is a cyclical world and we have the opportunity to buy low and sell high as opposed to being single in domain or single in stage and then be forced to buy high and sell low.

Steve Zarrilli

Yes, let me add a different and additional lens to this Reggie going back to diagnostics for life sciences, and this really applies across the board but they try to be even more targeted to your questions on that particular matter. You know, there is many such situations where we will find that we're initially competing for an opportunity and we're not comfortable with the valuation and we push back and in a couple of scenarios we will lose the opportunity.

But we’re wanting to make sure that we're staying discipline to our valuation thought processes. In many cases that conversation ultimately gives rise to an opportunity for a revaluation or a rediscussion of the evaluation of the company on a pre-money basis and we benefited from that. So part of this is you've got to kind of cut through the hype when you're going through your diligence process and given our expertise and our track record, we seem to be having the ability to bring these conversations to a much more meaningful level of dialogue around real rational elements that are going to drive value.

And it doesn't always produce an opportunity for us to deploy capital, but more times than not it appears that we are being able to kind of level set the discussion at a different level so that we can legitimately evaluate the opportunities. So it's an art not a science, and the general marketplace today has been relatively stable from the standpoint of valuations haven’t plummeted nor have valuations kind of ran away with a wave from the mean that we saw in the last 24 to 36 months.

Reggie Miller – CSLA

Hi guys, thanks very much.

Peter Boni

Sure thing Reggie.

Operator

Your final question comes from Allen Zwickler from First Manhattan.

Allen Zwickler - First Manhattan

I have two questions. One, and I came on a little late and I apologize. Did you discuss what your next year’s for lack of a better word commitment or capital budget was for new investments?

Peter Boni

Hi Allen. We haven't discussed guidance for 2012 at this time. That will come at a later date. So the guidance that you'll get at a later date will be revenue guidance, capital, I mean cash guidance as well as operating expense guidance.

Allen Zwickler - First Manhattan

Okay, and so for this year you’ve said you're going to spend how much. Could you repeat that please?

Peter Boni

This year's range was between $100 million and $150 million inclusive of operating expense Allen, debt repayment which was $31 million and capital deployment including Penn Mezzanine.

Allen Zwickler - First Manhattan

Okay, but what I'm trying to get at if you will bear with me is you know, debt repayment that's not you know, I understand that that is separate. In other words what I'm trying to get at is what is your commitment to spend on roughly this year, last year and next year roughly on new investments. Do you follow what I'm saying? Not so much, whether you pay down debt or not. I mean, what's the mindset of the company at this point? Could you elaborate on that?

Peter Boni

Sure. So let's do some simple math as it relates to 2011. We had a range of $100 million to $150 million if you take the top end of that range and reduce that by debt and operating expense that gives you a top end of the range of $100 million for deployment in new and existing partner companies.

Allen Zwickler - First Manhattan

Okay.

Peter Boni

And we have not yet finalized our thought process on 2012 and we will communicate that probably at the beginning of 2012.

Allen Zwickler - First Manhattan

Fine, and what if we did the same number for 2010 what would you say that number was roughly.

Peter Boni

2010 was if memory serves, and keep in mind we were pre-exit in monetizations. We were somewhere between $50 million and $60 million.

Allen Zwickler - First Manhattan

Okay, so what I'm trying to get at is if you have $280 million net cash, is that correct?

Peter Boni

$234 million net cash.

Allen Zwickler - First Manhattan

Right, $235 million net cash and $20 million shares. So just you know, just philosophically if you bear with me what is the damage in rewarding shareholders on a one-time basis and saying, you know, we sold three or four companies, maybe we should give you my number, you know, a dollar a share dividend. Again I'm being philosophic, but just to show that when you sell a series of businesses what you've been very successful this year, and I congratulate you that there is some give-and-take to show that you know, if the shareholder is getting something for you doing what you've done. Is that sound you know, out of the reach of management’s – you know, of the board’s thought process?

Steve Zarrilli

So philosophically as you would probably agree management has a fiduciary responsibility to review all uses of cash, and to create the greatest opportunity for shareholder value. We still believe Allen based upon what we are seeing as flow of opportunity that the highest and best use of our capital today is in the deployment and the pursuit of these opportunities we're seeing in the marketplace. So having said that and I think I've been pretty consistent with this, every quarter Peter and I sit with our board and evaluate the landscape and have an active dialogue to make sure that we're not missing any element of our thought process as it relates to how we best provide that shareholder value.

Allen Zwickler - First Manhattan

Okay, I'm not suggesting you don't do that. I'm just suggesting that this has been an unusual year, a good year by the way in the course of what would only be viewed as a volatile year in the world, and I think that's an understatement.

Steve Zarrilli

I would ask you to look at the world also through one other additional lens if you mind and that is when you think about the net cash available for capital deployment of $235 million and you view Safeguard in relationship to some of the peers that we're trying to work with the Carlyles, the Oaks of the world, $230 million at any given time for the deployment of capital.

Is it a number that I think is outrageously large? In fact we're just now at a point where we can potentially keep and pursue the pace of deployment to match the opportunities that are being presented to us. So I think you need to give us some time here to demonstrate that the deployment of capital into some opportunity is like a Putney, like a Pixel, like a NovaSom. As we move into 2012 we're going to provide some real substantial upside value for shareholders.

Peter Boni

And Allen we get capital markets advise on a continual basis. Hypothetically we had so much capital that we couldn’t possibly put it to use to enhance shareholder value. Everything is on our table in order for us –

Allen Zwickler - First Manhattan

No, I'm just talking about rewarding you know, on a given because you had such a good year. I'm not saying it's something you should do every year. I want to be clear about that. That's all.

Peter Boni

I understand your point of view. Thank you.

Allen Zwickler - First Manhattan

Okay, thanks.

Operator

At this time there are no further questions. I would like to turn the call back over to the speaker for closing remarks.

Peter Boni

Okay, thank you very much ladies and gentlemen for your interest in Safeguard Scientifics. We hope we can continue report progress as we execute our game plan. Thanks again.

Operator

Thanks for participating in today's conference call. You may now disconnect.

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